Training Fleas And RBC

Escape the circus and live beyond the limits of the imaginary lid. Comment on the RBC rule.


This YouTube video demonstrates how to train fleas. This column beseeches credit unions to not behave the same way when it comes to their federal regulator and risk-based capital rules.

The sequence of events the video illustrates are as follows:

  • The fleas are placed in a glass jar.
  • A lid is placed on the jar and left undisturbed for three days.
  • When the lid is removed, the fleas will never jump out of the jar; their behavior has been set for the rest of their lives.
  • Moreover when the fleas reproduce their offspring will follow their example. 

Policy Lessons For Risk-Based Capital

The NCUA’s RBC #2 proposal lists more than 70 categories for which credit unions would be required to calculate capital per their legally mandated risk weighting.

These weightings — like the lid on the jar — become the primary screen for filtering decisions such as what assets a credit union should hold, how loans should be priced, and the composition of the balance sheet.

This one-size-fits-all formula will reduce the diversity of credit union activity and in so doing, change the focus from serving members needs first to meeting examiner expectations.

Two Comment Letters Address This Outcome

Chuck Bruen, CEO of First Entertainment Credit Union ($1.1B, Hollywood, CA) wrote this in his Feb. 13 comment letter:

“The NCUA’s risk-based capital rule is overly complex and inappropriate for credit unions and their business model. ... NCUA’s risk-weights also experimentally incent and dis-incent credit union lending and investment behaviors in unprecedented and untested ways.”

This topic of steering lending decisions was also a concern in a comment posted by Randy Karnes, CEO of CU*Answers:

“I believe the revised RBC rule penalizes credit unions for specific activities such as real estate lending, member business lending, and credit unions chartered to assist the un-bankable, by placing a capital tax on the resulting assets from low income or credit lending to the poor.

“We believe the end result will be thousands of homogenous balance sheets in 2025 that the NCUA can easily understand from a supervisory perspective. However, this current risk posture of the NCUA cannot but fail to lead credit unions to shy away from diversity or the cooperative reason for the charter and field of membership.

“This rule would ultimately force credit unions into potential areas of investment and lending in which the credit union lacks experience, or create industry-wide concentrations that could be impacted by similar economic variables. In and of itself, this rule creates more risk than it proposes to control.”

FDIC Vice Chairman Analyzes RBC And Finds It Flawed

These concerns are not theoretical. The banking industry’s reliance upon the RBC formula already shows how it creates incentives that do not enhance safety and soundness. The outcome can even undermine the critical economic value contributed by financial intermediaries.

FDIC vice chairman Thomas Hoenig noted this in a speech to the International Association of Deposit Insurers in April 2013:

“If the Basel risk-weight schemes are incorrect — which they often have been — this too could inhibit loan growth, as it encourages investments in other more favorably, but incorrectly, weighted assets.

“Basel systematically encourages investments in sectors pre-assigned lower weights — for example, mortgages, sovereign debt, and derivatives — and discourages loans to assets assigned higher weights: commercial and industrial loans.

“We may have inadvertently created a system that discourages the very loan growth we seek, and instead turned our financial system into one that rewards itself more than it supports economic activity.”

RBC Comments Needed More Than Ever

The second comment period is even more critical than the response to RBC #1. The debate now is not about risk weights, ratios, phase-in periods, etc., but whether this new rule is good public policy for cooperatives.

The impact of the rule will be to create behaviors contrary to credit unions’ purpose and role in the market place. It will decrease diversity and increase asset concentrations.

Credit union leaders must not act like fleas in the jar. Comments on RBC#2 are more critical than ever — or this new rule could become a lid on the future of your credit union and the credit union movement.

Raise Your Voice for your credit union and the industry. Stop by booth 162 at the GAC to make an RBC comment, grab a button, and take a photo. Bring your colleagues. The first round of risk-based capital comments topped 2,000. Anything less for round two is a sign of approval. Cooperatives have a voice in their regulation; it's time to raise it.

Submit your comment today through the NCUA or through the Raise Your Voices web page.


March 2, 2015


  • I’m a capitalist at heart and advocate less rather than more regulation (despite experiences at the Fed and FDIC on my resume). That said, I think Chip raises interesting points in his warning about trained fleas. I take exception to two comments. Randy Karnes argues that credit unions will be penalized for “…member business lending…” Thomas Hoenig comments that the rule “…discourages loans to assets assigned higher weights: commercial and industrial loans.” These comments imply that credit unions are (or should be) in business to fund businesses. While this activity is increasingly common, it seems out of synch with the original mission of serving folks of modest means. Trust me; I’m not trying to stoke the bank vs. credit union debate. But consider the following: 1. What about the shareholder? They are the ones who bear the risk. Yeah – I know. This is capitalism 101. Shareholders choose their investments based on the expected risk and reward. But that’s where credit unions as a class really diverge from most other businesses. In my opinion, the shareholders (members) don’t really have a sense of ownership nor the perception of the risk/reward proposition when they choose to “invest” in a credit union through their deposits. If my opinion is correct, are the RBC rules on target in the sense that they seek to protect the [unwitting] shareholder from undue risk? 2. What about the depositor? They’ve been warned of the limits on deposit insurance. The warning is posted on the door and the teller counter. Shouldn’t I (or my financial advisor) be savvy enough to mitigate the risk of losing deposits by spreading my money among accounts or institutions? If losing deposits is a risk, it’s born by the well-heeled folks. Who else would have enough on deposit to create the risk in the first place? In that regard, the RBC rules may be creating an unnecessary hedge. Which leads us to… 3. What about the insurance fund? Maybe we need to be candid about who (or what) we’re trying to protect with these rules. On this score it seems that more rules ensure consistent employment for examiners and tougher exams for credit unions. To me, this seems like the category where we risk choking the “serve the underserved” mission by subordinating it to that of surviving the exam. The “too big to fail” question is a subset of this topic, but we’ll leave that as a discussion for another day.
    John Hyche
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